Binaries gaining popularity
January 28, 2005admin No Comments »What chance is there that the FTSE 100 will close higher on Monday? If you reckon you know the answer and would be prepared to back it, binary betting may be for you.
By focusing on a specific event the chance of the FTSE rising, oil breaching $50 a barrel or the pound reaching $2 you can play the markets much as you might have a flutter on the horses. “It is the middle ground between spread betting and fixed odds betting,” says Christopher Sparke of betting exchange Binexx.
Conventional spread betting targets a direction, and its return is geared to how far in that direction a particular security moves. Binary bets, on the other hand, have predetermined profits and losses at the outset with the chance of one or the other determined by the odds you are offered.
While this puts a ceiling on how much you can win, it also removes the worry of losing more than you can afford. “There is no unlimited liability, so that’s a real advantage over conventional spread betting,” explains John Austin, head of proprietary trading at Binarybet.com, the biggest company in this fledgling industry.
You can bet on a wide variety of financial outcomes. FTSE indices are available for day, week and year-long durations. You can also bet on major currency movements, the direction of US interest rates and movements of the main US and German share indices.
Binary betting appears particularly to appeal to volatility thrill seekers who are looking for rapid short-term gains. Austin explains: “80 to 90 per cent of the trade is in the last 10 to 20 minutes of a contract, and it’s frantic in the last five.” The odds are quoted in the form of a percentage chance of a particular event occurring. The higher that percentage, the more likely a certain event is, and the less you will win if it does occur.
Odds are much easier to work out than the often complicated odds quoted at race courses because the stake is quoted per percentage point, and all wins are 100 points and all losses zero.
So if you take odds at 30 per cent and win at 100 per cent, a £1 bet is worth £70, a pound for each point you win. If you take odds at 3 per cent, which on the race course would be a real 33-1 outsider, a £1 per point bet would win you £97.
A simple type of bet is that, say, the FTSE 100 will close up on the day. If you bet when the market is already a little lower, you may be quoted odds of, say, 25 per cent. That means a 25 per cent chance the event will occur and a 75 per cent chance that it won’t, and it equates to 3:1 odds. If you bet £5 per point, you calculate your potential winnings as (100 minus 25) x £5 = £375. Losses would be (0 minus 25) x £5 = £125.
You can just as easily use a binary sell bet the chance that a certain event won’t happen. These are simply the inverse odds, adjusted for the spread, from which the broker makes his money. In the example above, you might be quoted, say, a 72 per cent chance that the index won’t close higher on the day.
Unlike normal betting, where you must hold your bet, binary betting allows you to sell out before expiry. Going back to our horse racing analogy, that could allow you to turn a profit in the Grand National when the rank outsider you backed before the start is temporarily leading, even though there are still fences left to go. The implication is that you can work your position, buying and selling bets, and even laying off risk. So binary betting does not just allow you to indulge a passion for pure speculation, you can also follow other financial markets’ risk tools such as hedging or cutting your losses. While to punters most of the providers look similar, they operate in different ways. Industry leader Binarybet.com, which is part of IG Index and boasts several thousand clients, acts as a bookmaker. Therefore it sets odds and takes the other side of every client’s bet.
Binexx.com typifies the other approach. This company, an offshoot of City Index, acts as an exchange. Clients see an order book of intended buys and sells on various contracts, and deal with each other. The spread narrows as open interest increases, while the company takes its fees through a small fixed commission on each contract matched.
Binary betting is growing rapidly, and now accounts for 25 per cent of all the financial bets at IG Index. With some investors having burnt their fingers with the unlimited liabilities of conventional spread betting, some of the big industry spread-betting companies such as Cantor and Finspreads are expected to enter the market soon.
www.binexx.com
www.intrade.com
www.twowaybet.com
www.binarybet.com
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